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German Aviation Press Club, Frankfurt

It is a pleasure to join you here in Frankfurt. Thanks to The German Aviation Press Association and BARIG.

Air transport is critical to the global economy. Airlines are the US$450 billion heart of a value chain. That supports US$2.9 trillion in economic activity. In Europe this brings employment to 7 million. And adds US$1 trillion to the European GDP. And in Germany. This means over one million jobs. In contrast to the rail system that is subsidised by EUR 6.2 for every journey in Germany. Air transport pays EUR 7.5 per journey towards infrastructure and other costs. These are a lot of numbers to support a simple but critical message:

Air transport is an important industry. Correct policy decisions are essential to ensure that aviation continues to contribute to Germany’s competitiveness.

That is what I want to discuss with you today. But first a word about IATA.

IATAIATA’s mission is to lead, represent and serve the air transport industry. We represent over 260 airlines. That is 94% of scheduled international traffic. Our settlement systems handle US$245 billion each year. Our German BSP was established in 1983. And settles US$10 billion annually.

An Industry in CrisisWe are leading an industry in crisis. This month marked the 5th Anniversary of Sept 11 Since then airlines have lost over US$40 billion. Change has never been more important for this industry. Airlines responded with efficiency. Labour productivity increased 33%. Sales and distribution costs dropped 10%. And non-fuel unit costs reduced 13%.

Unfortunately the billions saved have been eaten by a rising fuel price. The 2001 fuel bill was US$43 billion. 13% of operating costs. This year we expect a bill of US$115 billion. 26% of operating costs. The increase in the last year alone was US$24 billion. But airlines still improved the bottom line. From a US$3.2 billion loss in 2005 to a US$1.7 billion loss this year. And next year we may even make a small profit—less than US$2 billion.

We are improving. But save the Champagne. To recover the cost of capital and pay a return to investors. We need to see profits in excess of US$45 billion. And a lot of hard work lies ahead. Today I would like to update you on two important IATA projects. The IATA Operational Safety Audit and Simplifying the Business. And then discuss some challenges with particular reference to Germany.

Infrastructure

Security and

Liberalisation

IOSALet’s start with safety—our top priority. 2005 had the lowest hull loss rate ever. 0.76 accidents per million sectors industry-wide. 0.35 per million sectors if you just look at IATA’s carriers. The IATA Operational Safety Audit—IOSA is at the core of our efforts to further improve safety. It is the first global standard for airline safety management. And we made it a condition of IATA membership from 2008. Adding a mark of quality to our association. Already over 200 airlines are in the process. Including 7 of our 12 German members. Many governments are incorporating IOSA into their safety oversight. Switzerland and France are the most recent in Europe. And I encourage the German government to do the same.

Simplifying the BusinessWhile improving safety—we must also improve efficiency. IATA leads many of the industry’s most important processes. In 2004 we started a process to Simplify the Business. We have five projects that will make travel and shipping more convenient and save US$6.5 billion. These are

Bar Coded Boarding Passes

RFID for aviation

Common Use Self-Service Kiosks - Germany is a leader here with kiosks operating in Frankfurt and Cologne

E-freight—taking away paper from the cargo business

And 100% e-ticketing by 2007

E-ticketing is our most important project with a firm target deadline. We are currently just over 60% e-ticketing globally. On target to reach 70% by year-end. Germany is nearly there at 67.8%. And Lufthansa is slightly ahead at 72.9%. I am fully confident that we will reach our ET target. Because we control all of the processes involved.

E-freight is more difficult because we rely on governments—particularly customs organisations. It is taking away the paper—and also the passport. And the savings will be US$1.2 billion. In this Germany is a bit behind. We are targeting five countries to kick-start e-freight. Frankfurt is a leading cargo hub—but Germany is not on the leadership list. Germany signed the Montreal Protocol for electronic documentation. But the legislation to support it is not yet in place. I challenge Germany to speed up implementation. Or risk its position as an industry leader. Remember, air cargo transports 35% of the value of goods and services traded internationally. A competitive air cargo sector is essential to a competitive economy. I encourage Germany to follow-up with the e-freight programme as a priority.

ChallengesTurning the industry around requires a shared vision by our partners. That means aligning airports, air navigation service providers and governments. For this, there are some specific challenges for Germany.

InfrastructureThe right infrastructure and a clear policy are critical for success. As Germany prepares to take on the European Presidency, there are some urgent items on the agenda. These are opportunities for Chancellor Merkel deliver an agenda to regain a leadership role in aviation. Both for Germany and for Europe.

The first is the privatisation of DFSWe are encouraged that DFS privatisation is moving forward. Commercial discipline should bring efficiency and value-for-money. But I have three concerns

1.The government is fattening the company to command a higher selling price

It is increasing en-route charges by 12.8%

And terminal navigation fees by 11.4%

2. DFS customers are being asked to pay a EUR 780 million pension deficit

3. And the weighted cost of capital—9.4%—is too generous for a monopoly supplier with a steady income

Privatisation must deliver safe and quality services with greater efficiency. We must avoid a short-sighted cash-grab that negatively impacts long-term German competitiveness. So, I counter with three proposals.

1. The government’s planned economic regulation must be effective—with teeth

Challenging DFS

To do better than inflation

To improve on-time performance

And ensure the safest of operations

Airlines pay a large bill EUR 9.5 billion bill for air traffic management in Europe

Nearly EUR 1 billion of that is in Germany

Like any customer, we have the right to expect efficiency and good service

2. Second, the government must take on the pension deficit. It did this for Deutsche Telecom and Deutsche Bahn. There is no reason to treat DFS differently.3. Finally the cost of capital must be calculated more realistically. UK NATS is profitable with a cost of capital at 6.75%.

I have raised all of these issues with the Minister and look forward to a positive result. I also encourage Germany to look at the big picture of European air traffic management. With 34 providers—it’s a bureaucratic mess. It is safe—absolutely. But is 60% less efficient than Australia. And 30% less efficient than the US. This is an expensive competitive disadvantage for Europe. The bill for European air traffic management is US$9.5 billion a year. Of this, US$3.3 billion is to pay for the inefficiency of fragmentation.

The answer is a Single European Sky and it is being held back by politicians without vision. I cannot accept that Europe can achieve a single major European currency but cannot find the political will to unite its skies. This is a wake-up call for Germany to take a leadership role. Not just in Germany, but in Europe. Chancellor Merkel has stepped into global politics with great enthusiasm and energy. Ensuring the successful privatisation of DFS is an important step. But I also hope that during German presidency of the European Union, the Chancellor will bring an end to 15 years of talking. We need a visionary approach—as Delors had for the EURO. To make a Single European Sky a proud reality.

Airports are also a key part of the infrastructureI have three worries about Germany. First is the cost. Frankfurt airport is expensive. 15% more expensive than the average for other European hubs. Frankfurt is moving in the wrong direction. Proposing to increase fees 2% next year. Airlines reduced non-fuel costs, improved safety, invested in new capacity. And lowered the price of travel by a third in the last decade. Airports must achieve the same. Some have reduced costs per passenger

Manchester by 38% in the last four years

Rome by 25%

And Birmingham by 13%

Others have not yet seen the light. Fortunately, the European Commission understands the problem. At our Paris AGM Vice President Barrot promised a directive on airport charges this autumn. It must include a requirement for effective economic regulation for airport monopolies at the national level. Nobel Prize winner Joseph Stiglitz pointed this out in a recent paper on privatisation of airport infrastructure. He argued that many infrastructure projects are a disappointment. Because government ownership is not responsive to customer needs. And private ownership is too responsive to shareholders. The answer is having the right incentives. In my opinion, effective economic regulation of airport monopolies—regardless of ownership—is critical.

My second concern is a vision for capacity. We all know the story of Kockstadt Airport. Building capacity with no demand makes no dollars—or sense! The potential EUR3 billion for a new Berlin airport could also be a bit over-ambitious. Berlin is a medium-sized market. It needs an efficient airport. Let’s make sure we don’t get another Taj-Mahal. The demand is for hub growth—and that means attention to Frankfurt. It is the third largest passenger hub in Europe. And the largest for cargo. But its growth rate for passenger traffic in 2005 was 2.2%. Well behind 4.9% at Paris. Similarly Frankfurt cargo traffic grew by 6.7% . Compared to 8.2% at Paris. A much-needed fourth runway is scheduled in 2009. This will help. But from that time there are also plans for a ban on night flights. Half of Frankfurt’s cargo and charter flights operate during the planned 11pm to 5am ban. This risks up to 7.300 jobs. Let’s build infrastructure that supports success and competitiveness.

Finally, we need speed. Frankfurt’s fourth runway will take at least 12 years to complete. And the process to open Munich Airport took 29 years. I cannot give either a gold medal for speed!

Look at the Middle East or China. Infrastructure projects are operational within a decade. And support 15 to 20% growth. To maintain competitiveness and regain leadership, fast decisions are essential. Germany needs an infrastructure policy:

That puts safety at the top of the priority list

Regulates monopolies

Delivers timely investment in capacity where it is needed

And contributes to national competitiveness

SecuritySecurity, alongside safety, is a top priority. We are a much more secure industry since 2001. London showed that international cooperation and intelligence is working. But it also gave three clear wake-up calls.

First, the failure of BAA—the airport operator—to handle capacity is not acceptable. It is a wake-up call for all airports to look at their contingency plans. And be sure that the goal is continued operations.

Second, we need standardisation and harmonisation. Progress on safety is based on global standards and harmonisation. Governments improved security after 2001. But missed the boat on harmonisation. The US-EU passenger information fiasco is a clear example. Airlines should not be asked to decide which country’s laws to break. Europe’s privacy laws or US data requirements. We have two days to reach a deal. Governments must pay more attention to this.

The third wake-up call is on funding. Terrorism is a national security issue. It is a government responsibility to protect its citizens. And to pay the bill. They do this in parks, subways and shopping malls. So why have a separate bill for airports and airplanes? The 2 billion people using Deutsche Bahn take security for granted. Added measures since 2001 now costs airlines and passenger US$5.6 billion a year. The European Commission agreed that this is a state responsibility. Governments must take this cost burden. This includes Germany.

LiberalisationFinally, we need a vision for a liberalised industry. Last week I addressed an ICAO conference on liberalisation in Dubai. It was a follow-up to the 2003 Air Traffic Conference 5. That agreed to a vision of progressive liberalisation. The agreement was a landmark. But the results are few. Air transport is stuck with a 60 year-old bilateral system. Designed for a luxury state-run industry flying 9 million passengers in DC-3s. Wake up to 2006—we are mass transport for 2.2 billion passengers about to use the A380 and Boeing 787. It is a different world. And the rules must change. Governments have an essential role in

Safety

Security

Regulating monopolies where markets don’t work. Full stop.

We don’t need governments to determine markets. Passenger demand should decide. Our greatest hope for significant change is. A US-EU agreement on open skies and regulatory convergence. This trade discussion has become very political.

But I am optimistic: First because it makes good business sense. It could add US$5 billion to our bottom line. And second, because it fits within the traditional leadership role of the North Atlantic. Moreover, an agreement would allow us to start looking at ownership. Lufthansa and SWISS demonstrated that cross-border ownership is possible. Airlines are businesses. But the flag on the aircraft tail is so heavy that it is sinking the industry. Liberalisation within the European banking industry saw a 26% decline in numbers. But an enormous increase in their competitiveness.

We need to run our business as a business. No subsidies or handouts. In most cases airlines are free to go out of business. Merging across borders should also be an option. Governments must give airlines the same commercial freedoms that other industries take for granted.

ConclusionI am an optimist. Air transport is the most exciting industry in the world. We have come a long way. Our recent results are impressive. And show what airlines can deliver in very difficult circumstances. Now we need partners and governments to share our vision for a strong air transport sector . That contributes strongly to competitiveness. Germany is an a unique position. To lead change at home and in Europe. And deliver results meaningful results.